ARM OR FRM: WHICH MORTGAGE CONTRACT IS BETTER FOR CZECH HOUSEHOLDS?

Ivan Rybar and Petr Zemcik

ERES from European Real Estate Society (ERES)

Abstract: Household housing decisions are usually taken early in life and therefore have significant welfare consequences. There are two types of loans available for households: Fixed-rate mortgage (FRM) contracts and adjustable-rate mortgage (ARM) contracts. We investigate the welfare effects of fixed-rate and adjustable-rate mortgage contracts on Czech households by calibrating and solving a life-cycle model used for this purpose by Campbell and Cocco (2003). We compare the distribution of utility in simulations under FRM and ARM and find that FRM is preferred to ARM. This result is in conflict with findings that Campbell and Cocco (2003) report for U.S. households, probably due to higher inflation and real interest rate uncertainty in the Czech Republic.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2008-01-01
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